The Mess We Are In

I have been thinking about doing this for a while to help some people understand what is going on in our economy and with the government. I also will do this as best I can to keep the politics out of it and just name the facts. This is a very complex issue and I will make a series of posts breaking down each part and in the end tying it all up together and hopefully give everyone an understanding on how bad things are screwed up and how bad things are likely to get and when You understand the different pieces of the puzzle and put them together, You will see it for Yourself.

I want to break this down into a few subjects and give a basic understanding on how they work. I myself do not fully understand the mechanics of all of them but I have a basic idea how some work while I have a good understanding on others. I will try to make them as short as possible. They are.....

Stock market

Bond Market

Commodities

Currency

Interest rates

Government


I will in the end tie them together to give the "Big Picture" on how bad the government has messed us up and what to expect. I don't care what party You are in, They all hold fault in this. Some for putting this in motion, some for not stopping it.CF

This one is pretty easy to understand. Most companies start out private and are funded by their own funding or start from the ground up and work off of their own profits but when they want more money to grow they may want to go to investment money. One good source of that investment money is the NY stock exchange. The company has some criteria to meet and once accepted, and determined how many shares can be sold, there is an opening auction to decide the value of the companies stock. From then on, it is traded every market day. The stocks value is basically a reflection of the confidence of the investors of the company. The confidence is in the form of money. The company wants to draw in more buyers to drive up the price of the stocks to give previous investors still holding the stock a return. When the stock gets so high that people cant really afford to buy many shares, the companies will do a split of stocks to cut the value in half but the investors will now have twice as many shares but makes the stocks more affordable. when confidence goes away from a stock, the stock holders sell the stocks and the name of the game is to sell the stock before the large amount of selling drives down the value. Meaning You bought low and sold High.CF

Ed, don't worry about Boscoe hating you, he is a sissy.

When will you provide us with the first lesson?

There are two emotions that drive any free traded market. Fear and Greed. There is one always controlling the market. Greed is buying up the market until the buying outruns the market, then the selling that ensues when the buying runs out and selling takes over. The fear is knowing the market is overbought and being scared that the selling will happen too fast before You can get out with a profit. So from time to time, the market is overbought and oversold but there is a reason this happens. It is called price discovery and all the market does with this up and down see saw action is "discover" the true value of the market in general, right down to the individual stock, commodity etc.. When the economy is in good shape and companies are showing good profits, investors pour money into stocks because they are confident that there will at some point be a good profit return on their investment. This buying will continue until the market actually outruns the economy. This causes a pull back. This is a healthy thing as it keeps companies in check and helps the greed at check. As long as the economy grows, the stock markets and other markets tend to rise with the general economy. So the stock market can be seen as a general barometer of the economy. The market is always going up and down. It can also trend in that up and down motion either up, down, or sideways. uptrends are called Bull markets, Down trends are called Bear Markets and then there is the sideways trend. Money is being made in all these types of market trends. The economy and the General public traders like bull markets because this is growth. There has to be small, healthy pull backs from time to time though because what goes up, must come down but as long as the trend remains up, you make money over the long term because new highs will come eventually. What happens in a "Bust" is usually caused by a huge amount of greed or some bad outside influence which in the case of the recent recession, was caused by both. A recession is just a pullback on a larger scale and is a healthy thing when left alone because it tends to correct (run out of business) the root cause of the recession to start with. Outside influence by the government or some other source of influence can prolong the inevitable. If left alone, a recession can be short lived as the competition will absorb the demand of the poor acting business and get things back on a firmer footing bringing confidence back to the market and in most situations, bring a roaring recovery to the economy and in most instances, New Highs with an improved, better running economy. Recessions are supposed to be good things. When recessions are prolonged by outside influence they are called "depressions". I'll get into that one more later and some things will not have to be explained at this length.CF

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Originally Posted by Don G

Ed, don't worry about Boscoe hating you, he is a sissy.

When will you provide us with the first lesson?

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Got some up now Don. Will continue later.CF

The Bond Market is known primarily for Treasury Bills(Bonds). They can range from short term Bonds to long term. I know of 5 year bonds but I'm sure they come shorter and they go out to 30 year Bonds. Bonds are backed by the Government through the federal reserve and because they are backed by the government, they are thought of as a safe haven for investment money. safe haven as in the government will remain solvent to back the Bills. The investment return on the bonds is called yield and the yield is based from a percentage of the value of the bonds but the yields return work backward from a stock or commodity. A stock or commodities value goes up with more buying, the yield on bonds goes down as more bonds are bought. The government is basically saying that when bond prices are low, "We need Your investment money and will pay a higher yield to get Your money". When the Bond prices are high because of a high amount of bond purchases, the government says "We have plenty of people wanting to buy bonds so we will not pay as high of a yield". Even the higher yields will not match strong returns of the stock market so the stock market is the market of choice for most investors to make money. After all, making money is what they are doing for a living. They are going to go to the place that makes the most for them. Remember how the bond market works because it is part of what is going on with this mess we are in.CF

You hear it on TV a lot. Stocks and Bonds. Two different markets that are used together by investors to keep an investment flow coming in all the time. This is how it works. Being the stock market is the market of higher returns, it is the market of choice so as long as the stocks are not in trouble that is where most of the investment money stays. Because of that fact, the Bond prices fall and yields are high trying to buy some investment money. after all, the government uses the bonds to finance their spending along with tax revenue. Bonds are also a way the government uses to fund spending during a recession when tax revenue is lower because more people are poor and are not paying as much in taxes. A bank goes busted and scares investors out of the stock market, they in return go to the bond market and buy treasury bills (notes,bonds) as a safe haven. The yield goes down as the Bond prices rise but investors won't lose money. They just won't make as much. once the yields have fallen to near nothing, hopefully the mess has been cleared and fear removed and replaced by confidence and the money leaves Bonds and moves back to stocks. This is the simple explanation on how it works. There are other assets that the money could flow to like commodities. To keep it from being too complex, just think of money as water that is flowing to the place that makes more of it. It is not controlled by anything other than economic conditions of the general economy. Just barometers of the economy.CF

These are the things that we consume to live. There are three major classes of commodities. Energy, Metals, and Grains. Each is broken down into its own market. crude oil is the most traded of all commodities and is the King of energies along with RBOB(gasoline) and heating oil (diesel fuel). You also have natural gas and propane and other type fuels. crude affects most all of these individual markets as a whole but they also trade on their own Supply and Demand situations. The King of Metals is Gold and the King of grain is Corn. These all have there subcategories. Metals have copper, silver, platinum, etc.. the grains have Corn, Soybeans, different classes of wheat, oats, barley, canola and so on. Corn and beans have their own complexes with beans having the Soybean meal and Soybean oil markets. The two submarkets can drive the price of beans themselves because they have their own supply demand situations. If there is a glut of meal or oil, they go down and will pull down the price of Soybeans because that is lower demand on a bean product. Corn is the exact same way with Ethanol and dried distillers grains or DDGs. These commodities can cross classes to affect the other as well. If heavy selling is going on in crude oil, it can spill over into the grains and metals and cause them to sell off as well. Maybe not as much as crude, but it can cause a general sell off in all commodities. The value of the dollar also has a lot of impact on commodity prices. I was looking at a corn chart the other day and noticed the last major high price in the corn market came on the same day as the last major low price of the dollar. More on this later as these markets are related like stocks and Bonds are.CF

Currency is traded by comparing it to other currencies performance. Our dollar is priced daily against currencies like the Euro, the British Pound, the Japanese yen and so on. As long as these markets are stagnant, the dollar will trade its own fundamentals like what is going on here at home with interest rates here and the commodity markets. After all, Commodities show the buying power of the dollar and can fluctuate just as much as the power the dollar has on commodities. if demand rises on commodities and commodities in general go up together, it can drive the value of the dollar down. That's how it works. That is how the purchasing power of the dollar is defined by commodities. not only is the commodities going higher but the dollar is going lower. This is how it works when there is no other influences on the dollar. If the Euro is tanking like it has been because of the European economy, it automatically makes the dollar go up because people who are trading Euro's leave the Euro and buy dollars as a safe haven because they see the dollar as more secure right now. REMEMBER THIS too as this is part of our problems to come. Trying to pinpoint what causes the dollar to go up on any particular day can be hard because of all the different influences it has. Another thing that can drive the dollar down is printing more of it! The dollar is like any other commodity, when supply out grows demand, the value of it decreases. It is like air. Not very important until Your not getting any of it. printing money takes value away from it. More later.CF

I explained some on how Currencies and Commodities are related and to go into a little more depth, Commodities are used as a hedge by investors against a lower valued dollar. You hear folks hollering to buy gold on the radio all the time to hedge against inflation. What they are saying is that when currency values go into the toilet because countries are printing money like crazy, the investors trading that money will buy commodities with Gold being number one against the dollar. So as the dollar crashes, Gold soars and protects Your money until at some point, the value of the dollar goes back up. What would make the dollar go back up after dumping a new supply of dollars on the dollar market? INTEREST RATES going up. Interest rates going up will make it harder for anyone to get money easily. Meaning Loans are more expensive and that creates a shortage of dollars to buy things! The value of the dollar goes up which in turn makes its purchasing power go down which in turn drives down commodity prices. So the more money gets printed with low interest rates, the higher gasoline prices go with no change to its supply demand situation. If interest rates rise, it makes dollars harder to get, and price of gasoline goes down with no change to its supply demand situation. So one affects the other and can be very complex. What is going on now with the government is easy to see when You put all of this into perspective.CF

This is one that I don't know as much about as far as what controls them outside of the federal reserve. I know the reserve can loose control of rates if they are not careful as was seen in the Jimmy carter years. The set rates and LIBOR rates which is the interest rates the banks borrow money from the federal reserve and then add their own interest rates hike to make a profit lending money to the public. If the libor rate goes up, they just pass the increase on to the consumer. The banks can also raise rates as high as they want to over the libor rate but competition keeps them in check on that. Like I said before, there are other entities at control of interest rates besides the federal reserve that can make the fed loose control. The feds job is to keep rates low but also battle inflation. If commodity prices start rising faster than income levels, it can be dangerous. They don't like see commodity go up year over year by over 2% on average. To keep up under investment gains. If inflation starts going up to say 5% on all commodities in general, They can raise the interest rates by a couple percent, drive the dollar up and sink the commodity prices back down to a level more acceptable. They can't just kill the inflation though as that is how commodity producers stay ahead of their own input inflation. Its a balancing act and one I would not want to do.CF

Wow what a outstanding thread here. I'm almost afraid to comment here because I don't want this thread highjacked even though I'm dieing to chime in on some points or issues discussed here. I'm eagerly awaiting your segment on government. As for me when Ed speaks I listen. :popcornI

What the hey I just have no control. The answer for this thread "The Mess We Are In" can be wholly and completely be attributed to the last segment 'government' action and not with the inherent nature of man. JMHO here.

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Originally Posted by crappiefarmer

The Bond Market is known primarily for Treasury Bills(Bonds). They can range from short term Bonds to long term. I know of 5 year bonds but I'm sure they come shorter and they go out to 30 year Bonds. Bonds are backed by the Government through the federal reserve and because they are backed by the government, they are thought of as a safe haven for investment money. safe haven as in the government will remain solvent to back the Bills. The investment return on the bonds is called yield and the yield is based from a percentage of the value of the bonds but the yields return work backward from a stock or commodity. A stock or commodities value goes up with more buying, the yield on bonds goes down as more bonds are bought. The government is basically saying that when bond prices are low, "We need Your investment money and will pay a higher yield to get Your money". When the Bond prices are high because of a high amount of bond purchases, the government says "We have plenty of people wanting to buy bonds so we will not pay as high of a yield". Even the higher yields will not match strong returns of the stock market so the stock market is the market of choice for most investors to make money. After all, making money is what they are doing for a living. They are going to go to the place that makes the most for them. Remember how the bond market works because it is part of what is going on with this mess we are in.CF

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Also, think of the bond market as a place to lend the Government money and the yield would be the interest on that money You lend the government and again think about what happens when more and more lend the money to the government with bonds. The Yield Goes down and so You get less interest from the government You are lending to.

Other countries also buy our bonds too. For whatever reason they see fit.

Think of China. They have a trade advantage with cheap labor and they have a currency advantage as they keep their currency pegged under the dollar to keep an export advantage over us. Even though they have a trade advantage, They need us to buy their junk. What they do is, they take the profits from the junk they send over here, Buy treasury bonds to help fund our government so that our government will not go after them for their trade distorting practices because they are funding our governments bad spending habits. Our government is bought and paid for But! we also have the Chinese on the hook for Trillions of dollars of our debt and if they ever want to get their money back from our bonds, they are going to have to help us get to where we can pay them back.

The Chinese are finding out first hand about the snakes we have in Washington because We keep printing money to buy Bonds and that is hurting their investment and We Don't Care! That leaves me with tying all this together and I will do this tomorrow. Please go back and review every other part for tomorrow and I think you will get where I am coming from when You see it. It could be a lengthy post. This will go back to the 90s.CF

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Originally Posted by LBM

Wow what a outstanding thread here. I'm almost afraid to comment here because I don't want this thread highjacked even though I'm dieing to chime in on some points or issues discussed here. I'm eagerly awaiting your segment on government. As for me when Ed speaks I listen. :popcornI

What the hey I just have no control. The answer for this thread "The Mess We Are In" can be wholly and completely be attributed to the last segment 'government' action and not with the inherent nature of man. JMHO here.

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LBM, I think You will like the last post here as it will tell it like it is.CF

Well, I always enjoyed listening to Paul Harvey, so............I'm waiting for the rest of the story.

Great thread, Ed. Keep'um coming.

I'm like Scoutout, my head hurts and not in a good way.

Thanks for Your patience. Been a long day but I will jump right into it. Back in the late 90s, Fannie Mae was already in existence but Freddie Mac and Sally Mae were created and Fanny was given more ability to loan. Now as we know, they were created to help people get loans that were refused by the Private banks.

lending Rules got Lax and people did not even have to show proof of income to get a loan to buy a house through Fannie or Freddie. I remember hearing folks say they could buy a house and make house payments cheaper than they could rent a place. I knew something was wrong then but I didn't understand as I was in My mid 20's and knew nothing about markets. I remember Dad saying, "It can't keep going like this. Something is wrong and something bad is about to happen." That was in the early 2000's. Dad was early by a few years but He was right. Around that time, the private banks had relaxed their rules on lending because people were going to Fannie and Freddie in droves and the big banks were losing market share to the government. More finance regulations were removed along then as well that allowed Banks to invest in the Stock market. These Banks were using customer money as a pool to bet in the markets to create a huge stream of income. They became super banks but not too super as they were also making millions of bad loans and betting in the markets and doing unregulated swaps with insurance companies( Think AIG). A Swap is where the banks would transfer the risk to an insurer with the insurer banking on the strong economy keeping most people in their loan payments. the problem with the swaps was that the insurance companies were not big enough to handle a crash in the housing market and when the Insurance company could not keep the banks afloat when the housing bubble busted, They both went insolvent. And because the swaps were unregulated, they were not backed by the Federal reserve. keep in mind that all of this was done because this is the way banks had to compete against Fannie and Freddie.

Things were going bad at the banks when things were still good but insiders in the banks were polishing numbers in the books to make them look good to the share holders of the banks. This was referred to as "Cooking the Books". Goldman Sachs was very evil at this point as they were setting up their own investors. If you were in the inside crowd at Goldman, You were taken care of as they saw this mess coming. They told all of their Preferred investors to short the stock market or sell against the buyers and told their normal run of the mill investors to buy the stock market. When the market tanked, those who sold the market got the money of the ones who bought the market. How Goldman Sachs is still in business I'll never understand, Well maybe the fact that the Obama and Bush administrations were loaded with former Goldman employees. None of these banks have a clue as to how to cook the books like the Federal Government though. People go to prison for doing it in the private economy but it is common occurrence in the federal government.

The Tipping point started in 2007 but was not fully realized until 2008 when the market crashed. At the time, the US economy and the World economy in general were getting super overheated and investment money looked at how commodities that had been plentiful for decades were being drawn down by the physical demand of these super heated economies so investors started buying commodities. The three kings of commodities were the ones they bought up the most being Crude, Corn, and Gold because we were starting to run short of those commodities they had to rise in price to ration off demand. In other words, get to a price where it hurts to buy them to make you cut back. They found out 4 dollar gas was the magic number for us but that number also did something else....

It Uncovered the mess going on with the Housing market because when crude went to 147 dollars a barrel and gas went over 4 bucks, people started having to make a choice, Eat or pay their mortgage. Millions chose to eat and the defaults started pouring in at the Banks. The insurance swaps deals were faltering because the insurance companies bit off way more than they could chew. The first domino was Lehman Brothers. A Bank that had been in business for over 100 years. Gone forever. then several others started following suit. These banks also had ties to Europe and countries all over the world. If they were to go under, It would cause a loan freeze around the globe essentially crashing the world into recession, stopping most if not all business around the world to halt. this over an extended period could lead to societal breakdown. Riots, starvation, War and so on. The US Government decided to give the banks an infusion of cash to stop the bleeding. Then they did the bailouts to buy out the houses that were being foreclosed on. In other words, We Had to buy back the houses that the federal government made loans for that were backed by tax payers to people who did not have a snowballs chance in hell of ever paying the loans back! It came full circle as it flooded the market with homes and destroyed the home construction industry in this country. The people that were broke before were now bankrupt and we were left with a glut of houses that would take years to for demand to come back to buy them up for construction to really take off again. All of this because the government was trying to show they care and go into the home loan business to show those nasty bankers a thing or two. They sure did.

The government accuses speculators for running the commodities up and they are right they did. But if you have read what I have written about the markets, You will understand that these people only go into something when it is the best place to make money. The only time You buy commodities is when there is a supply shortage or there is a demand driven market like crude oil. Demand driven means that there is only so much supply and the demand has to be rationed off. That is why gas prices are so much higher now than it was just a few short years ago. THE GOVERNMENT WON'T CREATE AN ENERGY POLICY TO PRODUCE MORE ENERGY TO GET AHEAD OF DEMAND!!!! As long as You have this in place, Gas prices will periodically go high enough to stop You from driving because supply gets tight. As everyone cuts back, the supply loosens and the prices start coming back down. It is a vicious cycle that could be stopped but there are too many people in the Government and the oil companies making too much money to do anything about this. Wouldn't You like to get paid more for producing less of something? Enter the oil companies on that deal and they have a powerful lobby.

The government keeps blaming speculation and My favorite that is used by the current administration. "We can't go back to the policies that got us into this mess in the first place" Meaning tax breaks and free markets. They have the nerve and apparently the people of this country believed the current administration when the real "policies that got us into this mess in the first place was Fannie and Freddie!!!" Government programs!!!! So Government ruins the worlds largest economy and then blames the Economy!!!! And the people believe them!!!! But don't worry, Government is going to fix everything with More Government programs!!! We are sunk with Obamacare because we do not have the revenue to pay for it because our econimic revenue engine threw a rod out the side of its block!!! It is easy for government to blame the private sector for failing while it is the government producing competing programs designed to make the private sector fail!!! Government programs are never been good over the long haul. they will fail eventually. I am 37 years old and will not see social security because they spent peoples money that are in their 60s now a long time ago. Obamacare will fail too.

WHAT WE HAVE TO LOOK FORWARD TO. What is the government doing now, and what is coming in our future? I know You have heard the term stimulus. This is where all the market talk in the last posts gets tied in.

THE STOCK MARKET IS ON A SUGAR HIGH! Why would the stock market be making new highs when the economy stinks so bad? It should be in the tank right now and we should be 3 to 4 thousand points lower at least in my opinion than where we are. It is high right now because of the stimulus money. The federal reserve is printing money and buying treasury bonds. remember what happens when there is a huge amount of bonds purchased, the price goes up but the Yield (return) goes down. when they dump money into the bond market, it forces normal investment money from the private sector back into the stock market. Which because they don't want to be there in the first place because the economy stinks and does not reflect higher stock prices for companies not doing well because of the bad economy. They don't have much of a choice and the stock market high we are seeing right now is artificial and does not represent the true condition of the economy. politicians love the numbers as they think it looks good but tells You how evil they are to use the false numbers to fool the general public into thinking there is a strong recovery. CONTINUED...

So the stock market is being inflated by investment money being forced out of the security of the Bond market and could possibly be being led like lambs to the slaughter. Now we can also look at other aspects as to what they are doing to "Fix This Mess". The other areas of the markets are being affected as well. China has quit lending us money and is not buying our bonds anymore because of our crisis and because we started printing money, hurting their investment in our bonds. So now that we don't have them to help fund the government, the government prints dollars to fund itself but every time they do that it causes our dollars to cheapen so our purchasing power goes down. when that happens. commodities rise in price because the dollar is worth less. This is called INFLATION. But remember, the dollar also gets value in comparison to performance of other currency. Right now the Euro is in such poor position that it is worse than the dollar so the investors in the euros sell euros and buy dollars. While this is happening our Fed is printing money causing selling of the dollars . So the Fed is playing it smart and keeping a floor on the dollar as long as the EURO tanks and the buyers of the dollar coming out of the Euro can keep up with the sellers that are selling short the dollar. It looks like a flat market for the dollar while this is going on but that will change. The Euro at some point will stabilize and with all the dollars the fed has printed, the dollar will tank and commodities will skyrocket and we will go into INFLATION to even HYPER INFLATION. If this happens, we will need a wheel barrow full of cash to but a loaf of bread. With a weak economy and inflation, it is called Stagflation. Stagnant economy with high inflation rates that makes us all poor fast. This is where we are headed next.

Then down the road, something will need to be done about the inflation and you guessed it, the fed will raise interest rates and keep raising them until inflation stops. this will raise borrowing rates up so high that it keep producers from getting operating loans(Jimmy Carter)and producers of commodities will go bankrupt in droves. This is called DEFLATION. Prices will get cheaper for a while until the poorer economy can buy them cheaper and start building demand again. There will be more consolidating in the commodities sector. more super sized companies because they will eat the weak through this whole process and the government these days is perfectly fine with regional monopolies (too big to fail) so the vicious cycle will be starting all over again in another 10 years or so. we got a lot of down hill left to go before we even get there. And Think, all of this started with a government programs called Fannie and Freddie.

Sorry it took so long. Hope You understand it and I will try my best to help You with any of this and I would love to hear Your opinions.CF

Ed, thanks for putting all this in terms the common man can understand. Kinda sad those at the top don't seem to grasp the situation as well as you do.